Wednesday, December 10, 1997
Does the Money Really
By David Quinby ([email protected])
During one of my recent chats, the following exchange occurred between two of the participants: "How much do you have invested in the market?" The question was followed by the comment that since A had so much money in the market, then B must have only a few thousand in the market, or less. Therefore A must really know what he's doing and B must not. One interesting thing that I noticed during this conversation was that neither A nor B had mentioned whether they held any position in the stock that started this entire discussion.
This jousting brings up an interesting question, Does it really matter how much one investor has working in the market? Surely any investor who holds a position in a stock, whether a small investor or a "heavy hitter," would love to see his stock go up. So does it really matter how much each person has in the stock?
For Fools, the only real accountability is to measure one's percentage gains and losses. A 10% gain is 10% no matter how much is invested. If the small investor and the heavy hitter both make 10%, the "heavy hitter" makes more money, but the small investor has done just as well in relative terms. Is it proof that the "heavy hitter" did better because he made more money? I think not.
In fact, the heavy hitter may make more money on an investment than the small investor and still have done "worse" in percentage terms. If A invests $100,000 and earns a return of $10,000 and B invests $20,000 and earns $5,000, who has done a better job? A right? After all, $10,000 is better than $5,000, right? Wrong. A's $10,000 gain is only 10% while B's $5,000 gain is a 25% profit. B's performance is much more impressive even though it's based on a smaller sum.
Let's face it, the amount you have invested in the market doesn't make you a smarter investor. The smarter investor is the person who is willing to put the time and energy into the research. Everyone has to start somewhere. So the dollar amounts working in the market are going to be very different from investor to investor. The smarter investor is the one who gets more "bang for the buck," not the one with more bucks to bang around.